Question

Ryan, a cash basis, calendar year taxpayer who has been in and out of paying the alternative minimum tax for five years, has long dreamed of buying a houseboat and using it as a weekend getaway. However, the used 40-foot beauty he has had his eye on for the past two years has been just out of his reach financially. Now it is 2018 and the real estate market has rebounded. His house, which is his principal residence, has jumped in value, and he is thinking of taking out a home equity loan and using the proceeds for a large down payment on the boat, while financing the rest using a purchase-money mortgage the boat’s owner is willing to offer him.

Discuss the income tax implications of the transaction he is contemplating.

How might your answer change if Ryan decided to make the boat his principal residence and the house his second home?

Answer 1

1. Under the new TCJ Act, a person can deduct the interest paid on the home equity loan interest on home equity loans used to buy, build or substantially improve the taxpayer’s home that secures the loan. Here, buying a boat would be considered as personal expenses and would not come under the qualified residence loop.

2. However, if he take the boat as a primary residence then deduction of interest paid will be allowed as per release (IR 2018-32 issued on Feb 21).